Government Specialized Credit Institutions and Private Domestic Investment: The Case of Saudi Arabia

Ali Al-sadig

doi:10.1515/rmeef-2012-0044

Article

Government Specialized Credit Institutions and Private Domestic Investment: The Case of Saudi Arabia

Ali Al-sadig

Published/Copyright: April 23, 2013

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From the journal Review of Middle East Economics and Finance Volume 9 Issue 1

Abstract

With the aim of diversifying the country’s economic base and reducing the heavy dependence on the oil sector, the Saudi government established a number of Specialized Credit institutions (SCIs) in order to facilitate the expansion of the private sector’s role in the national economy. Thus, the main objective of this paper is to empirically examine the relationship between government credit provided to the private sector and the rate of private domestic investment in Saudi Arabia. We apply cointegration and Vector Error Correction Model (VECM) methodology and use data over the period 1968–2010. We find that private domestic investment is positively associated with credit provided by the government Specialized Credit Institutions. Yet we find that banking credit provided to the private sector has the largest impacts.

Keywords: Saudi Arabia; credit to private sector; specialized credit institutions

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1
With the exception to PIF, which provides medium and long-term loans to the large-scale government and private industrial projects not covered by commercial banks, all SCIs provide credit to private sectors in the same way as the commercial banks.
2
The government of Saudi Arabia follows a five-year development plan strategy and the first plan initiated was in 1970.
3
Data for outstanding loans are not available prior 1987. It should be noted that I did not use this variable in the regression. We used credit to private sector plotted in Figure 1.
4
Ideally, one may need to control for the real interest rate to capture the cost of capital but data are not available for the time span we employ in the current analysis.
5
Blejer and Khan (1984) use two measurement methods for public investment. They take the trend level of real public investment to represent public investment in infrastructure and the deviations of real public investment from the trend to represent public investment in non-infrastructure. They find that the trend of public investment positively affects private investment, while change in public investment from the trend negatively affects private investment. Therefore, they conclude that public investment in infrastructure stimulates private investment through raising firms’ productivity while other types of public investment discourage private investment.
6
I am following the same steps used by most of empirical work in this field, except testing causality relationships since I do not see any two-way relationship between the rate of domestic investment and credit provided by the government to the private sector. See, for example, Rousseaua and Wachtel (1998).
7
In non-reported results, I re-estimated the model using the sub-sample 1992–2009. The estimated coefficient on credit provided by the SCIs is positive and highly significant.

Published Online: 2013-04-23

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https://doi.org/10.1515/rmeef-2012-0044

Keywords for this article

Saudi Arabia; credit to private sector; specialized credit institutions